PRJ566: Project Planning and Management Payback. Agenda What is cost benefit analysis? Payback ...
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Transcript of PRJ566: Project Planning and Management Payback. Agenda What is cost benefit analysis? Payback ...
PRJ566: Project Planning and Management
Payback
Agenda
What is cost benefit analysis? Payback Examples
Costs--one time Development costs – wages, contract
fees Initial Training costs Initial equipment costs – hardware,
software, network
Costs--ongoing Overhead - facilities, office space, etc. Web site costs--domain name renewal, Web
hosting Communication costs--phone, Internet, and so
on Maintenance of software and hardware “Maintenance” of staff (ongoing training, and
so on)
Benefits-can come from Cost savings
People (use less), time (get work done faster), equipment (eliminate), mistakes (make less)
New services to clients - revenue Mandatory changes Strategic advantage
Make more money! Technical reasons
Cost Benefit Analysis
Timeframe0 Timeframe1 Timeframe2 Timeframe3Costsongoing cost 1ongoing cost 2recurring cost 1Cumulative Costs 0 0 0 0
BenefitsbenefitCumulative benefits 0 0 0
Cumulative means add in total from previous column
Include previous column total into next column
Project timeframe: months or years, etc
Note: be sure all costs are consistent to fit your timeframe. i.e. if your timeframe is months, each cost amount must be a monthly cost
Note: Timeframe 0 is for project development
Example 1 Purchase & Install Remote Control Software
Currently:
20% calls (=200/mo) involve visit to client’s office
Visit averages 15 min, with average 2 hour client wait time
Example 1Purchase & Install Remote Control Software
Currently:
Use $60/hr client time
Wait time costs 200 x 2hrs x $60/hr
Wait time costs $24,000 per month
Example 1Purchase & Install Remote Control Software
Proposed Solution:
$90,000 remote control software
To install--$10,000 labour and training
Maintenance of $8,400 per year ($700/mo)
Cost Benefit Analysis
Option 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200
Benefits
Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000
Agenda
What is cost benefit analysis? Payback Examples
Payback
Represents the point in time when the benefits are greater than the costs
Cumulative Benefits – Cumulative Costs
Example 1Option 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200
Benefits
Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000
Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800
Payback Analysis Payback period = time required to recoup
costs of project Payback occurs when accumulated benefits >
accumulated costs (the sooner the better!) Typically - there is a ceiling
Return on Investment Analysis You invested a certain amount of $ (costs) What did you earn on this money?(Benefits) What was your return in a certain amount of
time?
Return On Investment Analysis
ROI =Accum. Benefits - Accum. Costs
Accum. Costs
X 100
Example 1Option 1: Buy Software Timeframe 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6CostsSoftware 90,000Labour/Training 10,000Maintenance 700 700 700 700 700 700Cumulative Costs 100,000 100,700 101,400 102,100 102,800 103,500 104,200
Benefits
Customer time saved 24,000 24,000 24,000 24,000 24,000 24,000Cumulative benefits 24,000 48,000 72,000 96,000 120,000 144,000
Cumulative Benefits - Cumulative Costs -100,000 -76,700 -53,400 -30,100 -6,800 16,500 39,800
ROI Example 1
ROI =$16,500
$103,500
X 100 = 16%
Over 5 months
ROI Example 1
ROI =$39,800
$104,200
X 100 = 38%
Over 6 months
When Comparisons are Difficult What do you do when the best option does
not come out on top in terms of $? Look at risks Look at intangible costs and benefits
Example 2 GMS--Great Marketing Services asks the IT
Project Manager to research improvements to its outdated flyer development system
GMS develops marketing fliers for various organizations
Example 2 GMS collects photos, diskettes from client GMS scans photos, lays out flyer using old
flyer software GMS prints flyer, courier to client Client reviews, corrects, courier back GMS prints final copy, sends to printer GMS arranges for flyer distribution
Example 2Situation: Flyer development takes too long and is too
manual. Automation of the process is necessary
Manual systems are causing lengthy delays, high errors
Competitors are going to automation, to the Internet
Example 2One time Costs: Software $90k, Installation $120k Internet infrastructure (labour, hardware, software)
$190K PM Salary $100K Upgrade PCs/monitors $120k Train layout staff $20k Marketing to clients $80k
Example 2Ongoing Costs: Maintenance of internet infrastructure $15k/yr
then $17k/yr after 1 year New Software maintenance $10k/yr Hardware upgrade costs $15k/yr then $20k/yr
after 2 years
Example 2
Example 2Benefits: Save $70k/yr wages in review/correct process Save $40k/yr (1 employee) in layout process
(cut from 2 to 1 weeks) Estimate $50k/yr increase in business for 4
years, then stay level
Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5
BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New business 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000
Example 2
Example 2Analysis Payback ROI
Timeframe 0 Year 1 Year 2 Year 3 Year 4 Year 5CostsNew Software 90,000Software Ins tallation 120,000Project m anager 100,000Internet Infras tructure 190,000Hardware Purchase 120,000Training for s taff 20,000Marketing to clients 80,000Internet Maintenance 15,000 17,000 17,000 17,000 17,000Software Maintenance 10,000 10,000 10,000 10,000 10,000Hardware Maintenance 15,000 15,000 20,000 20,000 20,000Cumulative Costs 720,000 760,000 802,000 849,000 896,000 943,000
BenefitsWork saved in review 70,000 70,000 70,000 70,000 70,000Labour saved 40,000 40,000 40,000 40,000 40,000New bus iness 50,000 100,000 150,000 200,000 200,000Cumulative Benefits 160,000 370,000 630,000 940,000 1,250,000Cumulative Benefits - Cumulative Costs -720,000 -600,000 -432,000 -219,000 44,000 307,000ROI 5% 33%
Example 2 Analysis
Payback in Year 4 ROI = $44k/$896k = 5% at 4 years ROI = $307k/$943k = 33% at 5 years
Example 2 Recommendation?
Is this ROI acceptable to management? Payback takes a LONG time!
What are other factors? Competition--is there a choice? Risks--can clients handle new system? Risks--can employees handle new system?